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Efficient VAR discretization

Grey Gordon

Economics Letters, 2021, vol. 204, issue C

Abstract: Tensor-grid discretization of VARs is inefficient. In particular, when there are just a few variables or the VAR components are correlated, this approach creates large inefficiencies because some discretized states will be visited with only vanishingly small probability. I show how to construct an efficient grid by either pruning these low-probability states or working directly with sparse grids. Efficient grids vastly improve accuracy for a given grid size, or, conversely, vastly reduce the number of states required to attain a given level of accuracy.

Keywords: VAR; Autoregressive; Discretization; Sparse grids (search for similar items in EconPapers)
JEL-codes: C32 C63 E32 E52 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.econlet.2021.109872

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